Peru s Economic Boom and the Asian Connection

Peru s Economic Boom and the Asian Connection Cynthia A. Sanborn Alexis Yong PREPARED FOR THE CONFERENCE Reaching Across the Pacific: Latin America and Asia in the New Century June 20, 2013 Woodrow Wilson International Center for Scholars Washington, DC DRAFT PAPER CITE ONLY WITH PERMISSION OF AUTHOR Abstract This paper analyzes recent economic and diplomatic relations between Peru and Asia, with emphasis on China, Japan and the Republic of Korea. In the last decade, Peru has experienced remarkable economic growth, driven by global demand for its minerals and other natural resources, combined with sound macroeconomic policies and a firm commitment to international trade. Although Peru s relations with Asia tend to reinforce its overall position as a mineral exporter, the country has not experienced significant de-industrialization. On the contrary, through aggressive pursuit of free trade agreements (FTA) and new foreign investment, trade with Asia has increased in scope and diversity, with considerable dynamism in value-added exports to China and Japan. Furthermore, Peru s booming extractive industries have not only benefitted from Asian demand, but also from significant new direct investment, and from efforts by Asian firms to comply with high global standards for mining operations. Although policymakers can be credited for successful negotiation of FTAs, subsequent advances in trade and investment with Asian partners have largely been the result of private initiative. The authors conclude that if Peru is going to take better advantage of these opportunities over the longer term, to achieve a more diversified and productive economy, greater state leadership and strategic public policies will be necessary. Cynthia Sanborn is Director of the Research Center at the Universidad del Pacífico (CIUP) and a Professor of Political Science at that university. Alexis Yong is an Associate Professor of International Business and a researcher at CIUP who specializes in Asia Pacific trade issues.

Contents Introduction... Error! Bookmark not defined. Part I: Peru - Asian Relations: A Brief History..5 Part II: Peruvian Trade with Asia.9 Part III: Asian Investment in Peru... 21 Part IV: Final Remarks... 29 References 31 List of Figures Figure 1. LAC exports to Asia, by destination country 1990 2011... 10 Figure 2. Peru exports to Asia, by destination country 1990 2011... 11 List of Tables Table 1. Date of first Peru diplomatic relations with Asian countries... 6 Table 2. Peru exports and imports by sector to Asia main trading partners and the World, 1997, 2008, 2011... Table 3. Average annual growth rate of Peru exports and imports by sector to Asia main trading partners and the World, 1995, 2000, 2010... Table 4. Peru export and import structure to Asia main trading partners and the World, 1997, 2008, 2011... Table 5.Average annual growth rate of Peru export and import structure to Asia main trading partners and the World, 1995, 2000, 2010... Table 6.Realized and expected announced investments from Japanese companies... Table 7. Realized and expected announced investments from Korean companies... Table 8.Realized and expected announced investments from Chinese companies... 2

Introduction In the mid-19th century, thousands of Chinese were imported to Peru as slave laborers, replacing black slaves who had been freed. They worked sugar plantations and built railroads until they too, were liberated. Today, Chinese are again flowing to Latin America. This time, though, it isn't as laborers. It's as businessmen and government teams looking to acquire farms, forests and mines to fuel China's growth. --Thomas Friedman, New York Times, 2006 1 To tell the truth, I also light a candle every day and pray that China s economy does not fall on us. --Luis Miguel Castilla, Peruvian Minister of Economics and Finance 2011 2 In the last decade Peru has been one of Latin America s most impressive success stories, achieving sustained economic growth under political democracy, cutting poverty in half and producing an expanding new middle class. 3 The country s recent boom has been driven in large part by global demand for the minerals and other primary commodities that Peru exports, as well as by sound macroeconomic policymaking and a strong commitment to international trade. Expanding relations with Asia especially China, Japan and South Korea -- have been a key part of this story For resource-rich countries like Peru, the demands of a growing China in particular have offered exceptional opportunities to attract new investment and expand markets for traditional exports. In recent years, copper, iron, gold and other minerals have accounted for around 60% of total Peruvian exports, 25% of total FDI and 15% of total tax revenues. Although Western multinationals have accounted for most mineral investment and development in Peru since the 1990s, China is the main destination for Peruvian minerals and Chinese investment in this sector has increased significantly. Investors from Japan, South Korea and other Asian countries are also present in Peru s expanding portfolio of mineral, gas and oil concessions. Yet the global rush for natural resources has also revived longstanding concerns in Peru about the risks of excessive dependency on primary commodity exports, and the structural challenges to achieving a more diversified and productive economy. Indeed, the main motivation behind Peru s aggressive pursuit of free trade agreements with China (2009) and 17 other countries, as well as diverse multilateral trade agreements and alliances, has been to 1 Red China or Green, New York Times, June 6, 2006. http://www.nytimes.com/2006/06/30/opinion/30friedman.html?_r=0 2 Castilla: Rezo para que economía china no caiga, Diario Gestión, 3/10/2011. http://gestion.pe/noticia/1312136/castilla-peru-reza-que-economia-china-no-caiga 3 Growth reached 9% per year until the global financial crisis, and has remained over 6% per year since, while poverty was slashed from 53% in 2004 to 25% in 2012. Nearly 60% of Peruvians consider themselves middle class. http://www.americasquarterly.org/counting-and-being-middle-class 3

diversify the country s trade and investment opportunities. Dependency on mineral exports also raises concerns about the human rights and environmental implications of large-scale extractive activity, as rising conflicts between foreign companies and local communities have generated considerable political and economic costs. Such concerns are of course regional in scope. As a recent study from the Inter American Development Bank points out, trade between Latin America and Asia accelerated at an annual average rate of 20.5% between 2000 and 2011, comprising 21% of all Latin American trade, and this should continue to grow in the years ahead (IADB 2012: ). While this is great news for the growing number of Latin American presidents and business leaders who visit Beijing and other Asian capitals in pursuit of trade and cooperation, skeptics across the region fear that the huge Asian demand (particularly from China) for minerals, hydrocarbons and certain agricultural crops as a threat for balanced development. This skepticism is based on the acknowledgement that although overall trade with Asia has surged, the basic pattern has remained the same: the majority of Latin American exports are primary commodities, and the majority of FDI from Asia also goes into primary sectors, while Latin America imports a growing array of industrial goods from its Asian partners. The lion s share of this Asian surge involves just a few countries, Peru among them. 4 Despite considerable effort by governments and private sectors, there remains a fairly low level of diversification within the range of Latin American export products. By their nature, commodities tend to have decreasing economies of scale, volatile prices and low interconnection with other industries or economic sectors. The risk presented by Asian demand, from this viewpoint, is that persistent emphasis on basic commodity exports can reduce the region s modest manufacturing activities, leading to the stagnation of industrial development. While Asia today is the premier high technology manufacturer in the world, only two Latin American nations have maintained some significant international competitiveness in this area, Brazil and Mexico 5. Although this scenario might seem bleak, Latin American policymakers are aware of the risks of primary commodity dependency and anxious to overcome them. That is the story behind the Pacific Alliance and the Trans Pacific Partnership (TPP), as well as the proliferation of bilateral trade agreements and domestic policy initiatives to diversify trade and bolster nontraditional sectors. That is also the driver behind numerous academic initiatives aimed at understanding Latin America s new Asian partners, in order to take fuller advantage of these complex and evolving relationships. This paper aims to contribute to the regional discussion, through a closer analysis of the Peruvian case. The general questions it poses are the following: What has been the nature of Peru s economic and political relations with the major Asian countries, especially in the last decade? 4 According to Gallagher and Porzecanski (2010) Argentina, Brazil, Chile, Colombia, Mexico and Peru dominate Latin American exports to China. 5 Op cit.. 4

Have expanded relations with Asia helped or hindered Peruvian objectives of sustaining economic growth with greater social inclusion? Have they helped or hindered the diversification of Peru s economy, and the development of nontraditional export sectors? How or to what extent has new Asian investment affected Peru s efforts to achieve global standards for transparency and CSR in its mining industry, and to encourage stronger linkages between mining and the rest of the economy? Finally, how have Peruvian policymakers responded to these new opportunities for engagement with Asia? Have they been able to shape these relations in Peru s favor? This paper is an initial attempt to answer these questions, drawing on the combined experience of researchers at the Centro de Investigación de la Universidad del Pacifico (CIUP) and the APEC Study Center at the same university. 6 It is divided into four main sections. The first provides a brief summary of Peru s historical and political relations with major Asian countries, which are important for understanding current relations. The second presents a general overview of Peruvian trade with selected Asian partners, and the third analyzes the recent state of Asian direct investment in Peru. In the latter, special attention is given to the growing Chinese presence in Peru s extractive industries. The paper ends with final remarks about the Peruvian case in a regional context. Part I: Peru Asian Relations: A Brief History Peruvian culture is as old as Chinese culture; it originates from the Incan Empire, whose history must be spread. Because the mutual understanding of our civilizations will permit us to strengthen our relations, as are the objectives and willingness of both of our administrations. --President Ollanta Humala, state visit to China, April 9, 2013 7 Peruvian relations with Asia date to the 19 th century, when thousands of Chinese and Japanese workers were brought to the country in the wake of abolition, to labor on the large coastal plantations and other venues. Asian immigrants and their descendants have experienced exploitation and discrimination throughout Peruvian history, yet over time they have also achieved considerable economic success and relatively high levels of educational and professional achievement. Today, Peruvians of Asian descent comprise an estimated 3% to 5% of the population, and their influence on the broader society and culture is widespread. Although Peru now has diplomatic and trade relations with more than 30 countries across 6 The authors wish to thank CIUP colleagues Fernando Gonzalez Vigil and Jurgen Schuldt for their most useful comments, and research assistants Victoria Chonn and Alvaro Paredes for their outstanding contributions. Of course, the ideas expressed here are those of the authors, who bear sole responsibility for the content of this paper. 7 http://www.eurasiareview.com/09042013-peruvian-government-reinvigorates-bilateral-relations-with-chinaanalysis/ 5

broader Asia, its relations with Japan and China are especially strong due to these historical ties, which are frequently cited by each nation s leaders. Table 1. Date of first Peru diplomatic relations with Asian countries Country Date of first diplomatic relations Country Date of first diplomatic relations Afghanistan 2012 Maldives 1989 Azerbaijan 1996 Mongolia 1997 Bahrain 2009 Nepal 1976 Bangladesh 1983 North Korea 1989 1/ Brunei n.a. Philippines 1974 Burma 1989 Russia 1969 Cambodia n.a. Saudi Arabia 2013 2/ China 1971 Singapore 1980 East Timor n.a. South Korea 1983 Georgia 2010 Sri Lanka 2012 3/ India 1953 Taiwan 1978 4/ Indonesia 1975 Thailand 1965 Iraq 1975 Turkey 1952 Israel 1957 UnitedArabEmirates 2010 5/ Japan 1873 Uzbekistan n.a. 6/ Kuwait 1975 Vietnam 1994 Malaysia 1984 Notes: 1/ Year the North Korea embassy was established in Peru 2/ Year the Peruvian embassy was established in Saudi Arabia 3/ Year the Sri Lanka consulate was established in Peru 4/ Established in Lima the Far East Shopping Centre S.A. (Centro ComercialdelLejanoOriente S.A.). In 1990 it changed its name to Economic and Cultural Office of Taipei 5/ Year the Peruvian consulate was established in UAE 6/ Peru has a consulate in Uzbekistan China and Peru 8 China has been present in Peru for over 160 years. Between 1849 and 1874, some 100,000 Chinese men were brought to Peru as coolies or indentured agricultural workers, to labor on the sugar plantations and rich guano islands (Berrios 2010: 135). Chinese workers also helped build railroads and extract rubber and gold from the Amazon. In 1874, Peru and China signed a Treaty of Friendship, Trade, and Navigation, and in 1884 China sent its first diplomat to Peru. Free immigration continued until 1909 when it became officially regulated, and then prohibited in 1930 (Lausent-Herrera 2011: 70). 8 This section draws on the work of Carlos Aquino, Ruben Berrios and Isabell Lausent-Herrera, and the research assistance of Victoria Chonn. 6

Throughout the 20 th century, however, Chinese immigrants continued to arrive and the influence of Chinese people and culture in Peruvian society expanded. In the 21 st century, a larger wave of immigrants came along with the huge influx of Chinese goods and enterprises. One of the most visible signs of this influence can be observed in downtown Lima, where Chinatown or el barrio chino is located, housing a large conglomeration of businesses and shops owned or managed by recent Chinese immigrants or by Peruvians of Chinese descent (also called tusan) (Ibid). Today Peru has the largest Chinese ethnic population in Latin America, and many of its members have renewed ties with their ancestors homeland. Peru established diplomatic ties with the People s Republic of China in 1971, becoming the third country in Latin America to do so, after Cuba and Chile (Ibid: 136). In 2004, Peru was among the group of Latin American nations that granted market economy status to China. In 2008 bilateral relations entered a new phase, when then Chinese president Hu Jintao and his Peruvian counterpart, Alan García, exchanged visits and established a strategic partnership, which cultivated in a second visit by García in 2010. In 2009 Peru and China signged their FTA, which went into effect in 2010. In 2011, as they celebrated the 40 th anniversary of the establishment of diplomatic relations, the People s Republic of China replaced the United States as Peru s main trading partner. 9 Today around 100 Chinese firms are legally registered to operate in Peru, and in 2011 an Association of Chinese Enterprises was formed, with 43 members and support from the Chinese Embassy in Peru. 10 The 11 member council includes prominent state-owned oil and mining companies (SAPET, CNPC, Shougang, Chinalco, Minmetals), banks and technology companies. Peru is now the #1 location for Chinese mineral investment in Latin America, with at least 14 Chinese firms holding important concessions, although to date the Chinese own only one operating mine. In addition to trade and investment, Peru and China have expanded relations in other fields, including agriculture, health, education, technology and defense. In 2010 Peru became the first South American country to purchase Chinese military vehicles. Although the deal was later cancelled, in 2011 the Vice-President of the Central Military Commission of China visited Peru and signed a Memorandum of Understanding with the Peruvian Minister of Defense, in a joint commitment to strengthen military cooperation 11. During an official visit by Peruvian president Ollanta Humala to China in April 2013, the two nation s leaders celebrated their comprehensive strategic partnership by signing eleven new bilateral accords, aimed to optimize their trade infrastructure, strengthen cooperation in agriculture and infrastructure as well as minerals, increase cooperation for social development, and deepen their ties beyond the current trade structure. 12 9 Humala: China es el principal socio comercial del Peru, Diario Gestión, 21 November, 2011. Available at http://gestion.pe/noticia/1336974/humala-china-principal-socio-comercial-peru. In 2010 China was Peru s second major trading partner, purchasing 16% of Peruvian exports, and in 2012 it was first with 17% of Peruvian exports (some US $8 billion), while the U.S. was second with 13% ($6bn). 10 See http://asociacionchina.net/ 11 Peru has recently made military purchases from South Korea (Republic of Korea), where President Humala was stationed as Peru s military attaché in the early 2000s. See McClintock 2013. 12 See http://blogs.elcomercio.pe/planetachina/2013/04/once-y-empezamos.html 7

Japan and Peru 13 Peru was the first Latin American country to establish diplomatic relations with Japan, in 1873, and the first country to admit Japanese immigrants in 1899 (Berrios 2005). The first boatload of Japanese families arrived in 1899, followed by several waves of immigrants from Okinawa, Gifu, Hiroshima, Kanagawa and Osaka. Most also came to work on plantations, though the majority moved to cities when their contracts expired, and by 1936 they represented 45% of Peru s total foreign population (Kushner 2001). Today Peru has the second largest Japanese descendent ethnic community (or Nikkei) in Latin America after Brazil. Although they comprise less than 1% of the total population, they are highly concentrated in Lima, where they have established strong cultural and educational institutions. Geopolitical factors have shaped the lives of many Japanese Peruvians. During World War II, the Peruvian government collaborated with the United States by deporting hundreds of Japanese Peruvians to U.S. internment camps, confiscating their homes and businesses. Although 11 other Latin American countries did the same, 84% of the estimated 2,118 imprisoned Latin American Japanese came from Peru, and very few returned (Kushner 2001). While an estimated 10,000 Japanese remained in Peru during the war, prominent leaders of the community were blacklisted, their businesses were boycotted, they were forbidden to assemble in groups, and their schools and newspapers were closed (Ibid). For decades thereafter, many opted to maintain a low profile while rebuilding their homes and livelihoods. In the 1960s bilateral relations between Peru and Japan improved, as the latter turned to this region in search of raw materials necessary for its postwar reindustrialization (Berrios 2005). Trade relations with Japan were similar to those with most of the world, as Peru exported primary goods -- largely minerals and imported automobiles, machinery and equipment. Political relations with Japan by this time were cordial and Japan provided development assistance to Peru, though largely in coordination with the United States and mindful of the leading presence of the latter in Latin American at the time (Berrios, citing Smith 1990). Under Peru s lefist military regime in the 1970s, trade between the two countries expanded considerably, and Japan became Peru s second largest export market and third largest import supplier. Around 80% of Peruvian exports to Japan were minerals. The Peruvian military nationalized most of the mining industry, and the Japanese were willing to engage in joint ventures and work with government officials to develop new resources in exchange for longterm supply contracts (Berrios 2005, citing Stallings and Szekely 1993; De la Flor 1993). Although by the 1980s Peru also exported fishmeal, oil and coffee to Japan, international and domestic factors drove Peru into a severe crisis, and drove most new Japanese investments elsewhere (Berrios 2005). Ironically, it was a politician of Japanese descent, Alberto Fujimori Fujimori, who presided over Peru s emergence from the crisis of the 1980s. When he first ran for the presidency in 1990 there was a revival of anti-japanese sentiment among the traditional elite, as Fujimori s successful electoral campaign stressed his humble immigrant story and promised to secure generous assistance from his parent s homeland. The incorporation of other prominent Japanese Peruvians to the Fujimori cabinet also brought new attention to this community. Elite fears subsided considerably, however, as the Fujimori Administration reestablished 13 This section draws heavily from Berrios (2005) and Kushner (2001). 8

order, enacted drastic economic reforms and reopened the country to foreign trade. Peruvian relations with Japan reached a high point during his administration (1990-2000). Although some tensions arose between Peru and Japan after Fujimori fled to Japan in 2000, taking refuge in his dual citizenship to escape extradition on human rights and corruption charges, subsequent bilateral relations have been positive. The trade balance and flows with Japan in the 21 st century, discussed in the following section, have been positive. In summary, Peru has deep historical ties to China and Japan, which facilitate current efforts to promote broader trade and investment. Recent Peruvian presidents have paid state visits to both countries and taken care to celebrate these historical bonds. Has the cultivation of these historical ties paid off in economic terms? The next two sections address this question. Part II: Peruvian Trade with Asia In the last decade, trade with Asia enabled much of Latin America to withstand the financial crisis of 2008 and sustain positive growth rates. Between 2004 and 2008, trade between Asia and Latin America grew at an average annual rate of 25.7%, while exports to the Latin American regional market, the European Union and the U.S., grew at 24.8%, 20.8% and 20.9% respectively. Yet although Asia has become the premier destination for Latin American exports, most of this trade is concentrated in a few countries. By 2011, six countries explained 79.4% of Latin America s exports to Asia, with the three main markets being China (47.4%), Japan (14.3%) and Republic of Korea (7.9%). Moreover, as can be seen in Figure 1, the total importance of these three countries has remained nearly the same over 1990 2011, with a slight increase in the last five years. However, there is a clear change in their relative importance as destinations for Latin American exports over the last 20 years. While in 1990 Japan accounted for 48.2% of Latin American exports to Asia, and China just 6.1%, the roles were reversed two decades later. 9

Figure 1. LAC exports to Asia, by destination country 1990 2011 (share of total exports to Asia) Source: Authors calculations based on UN COMTRADE Obviously, this pattern reflects China's gravitational economic force, its hunger for natural resources and the ability of Latin American countries to feed that. Indeed, the data on trade value is influenced by the increase in commodity prices in recent years. As a result, the relative importance of some export destinations is overvalued due to their trade pattern as commodities consumers. Peru s trade with Asia follows the general Latin America pattern. In the last two decades, exports to the three top destination countries have explained nearly 83% of its total trade with Asia, and this has been even more accentuated in the past five years. By 2011, Peruvian exports to China, Japan and Rep. Korea accounted for nearly 92% of its exports to Asia. Although these three countries have remained the most significant export partners for Peru in the last 20 years, the relative importance of each has not remained the same. Figure 2 shows us the relative decrease in the export share to Japan and the continuous increase of China as the prime destination. In 1990, exports to Japan accounted for 67% of total exports to Asia, while China accounted for 9 percent. By 2011, Japan accounted for 18% while China purchased 59% of Peru s Asian exports. The Republic of Korea, however, remained constant at 10% of Peru s Asia exports throughout this period, albeit with a strong increase in 2011 when it reached a historical record of 14 percent. As seen below, the Rep. Korea plays a significant role not only in the expansion of Peruvian exports with a higher technological level, but also in bilateral cooperation at government level. 10

100% Figure 2. Peru exports to Asia, by destination country 1990 2011 (percentage of total exports to Asia) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Japan Korea, Rep. Thailand India Philippines Other Source: Authors calculations based on UN COMTRADE Apart from the three countries mentioned above, Peru has strong commercial links with countries in the Asia Pacific region. Thailand, the Philippines, Malaysia and Indonesia are countries with which Peru also has a history of trade, and the subscription of Peru into APEC in 1997 saw a relatively important increase in the share of trade with these countries. However, the effects of the Asian and Russian financial crises in 1997 and 1998 halted the emergent development of these commercial and investment relations. As mentioned in the prior section, China has clearly been the most important and dynamic partner for Peru, representing its single largest export market, and second largest source of imports after the United States. According to ADEX (the guild of Peruvian exporters), in 2012 China bought US $7.7 billion worth of Peruvian goods or 17% of total exports from Peru. 14 Moreover, total exports to China grew at a 20.6% average annual pace between 1995 and 2011, for an accumulate growth of 18.9 times, in contrast to Peruvian exports to the world as a whole, which grew 7.4 times over the same period of time. Peruvian exports to China remain largely primary goods, as seen in Table 2, with just four products copper, iron, lead, and fishmeal comprising 83% of the total, and largely explaining the positive overall trade balance. The relative share of these goods has changed since the 1990s, however. As recently as 1997, nearly 79.9% of Peruvian exports to China came from the fishery sector, while around 16.2% was minerals and oil. However, as seen in Table 2, in 2011 the shares were reversed; fisheries accounted for 17.5% and mineral and oil 14 China se mantiene como principal comprador de Peru en: http://spanish.news.cn/chinaiber/2013-02/12/c_132165166.htm 11

products together were 78.5%. This shift in the export pattern has been driven by China s enormous need for minerals in its process of industrialization and urbanization. Meanwhile, imports from China to Peru have increased more than those from any other country (Aquino 2013). In 1993, Peru bought $90 million in Chinese goods, while in 2012 it bought nearly $7.8 billion, or 87 times more, while total imports increased 10 times over. From 2001 to 2011, imports from China grew by 33 percent. While in 1997, the main products Peru imported from China were from the metal-mechanic and electronic sectors, by 2011 there was a greater variety of goods. The main rubrics in 2011 were capital goods for industry (31% of total), intermediate and primary goods for industry (23%), and durable consumer goods (17%). Among the most common goods purchase are mobile phones and phone equipment, computers, vehicles, and footwear (Aquino 2013). Table 2. Top 10 Peruvian exports to China in 2011 Level of technology sophistication Sector Commodity Code (HS) Commodity Description Trade Value NRBM Mining & Oil 260300 Copper ores and concentrates 2,417,569,333 PG Fishing 230120 Flour or meal, pellet, fish, etc, for animal feed 1,042,228,645 NRBM Mining & Oil 260111 Iron ore, concentrate, not iron pyrites,unagglomerate 1,000,887,459 NRBM Mining & Oil 260700 Lead ores and concentrates 723,723,644 PG Mining & Oil 740311 Copper cathodes and sections of cathodes unwrought 623,283,133 NRBM Mining & Oil 260800 Zinc ores and concentrates 256,397,372 PG Mining & Oil 790111 Zinc, not alloyed, unwrought, >99% pure 125,165,953 NRBM Fishing 160590 Molluscs and shellfish nes, prepared or preserved 122,360,116 PG Mining & Oil 740200 Unrefined copper, copper anodes, electrolytic refining 91,229,794 NRBM Mining & Oil 261610 Silver ores and concentrates 77,580,826 Table 3: Top 10 Peruvian imports from China in 2011 Level of technology sophistication Sector Commodity Code (HS) Commodity Description Trade Value HTM Metal- Mechanical & Electronics 847120 Digital computers with cpu and input-output units 405,270,468 HTM Metal- Mechanical & Electronics 852520 Transmit-receive apparatus for radio, TV, etc. 375,250,366 MTM Metal- Mechanical & 871120 Motorcycles, spark ignition engine of 50-250 cc 142,141,509 12

Electronics HTM LTM Various (inc. jewelry, crafts) Various (inc. jewelry, crafts) 852810 Colour television receivers/monitors/projectors 126,808,238 950390 Toys nes 109,711,716 HTM Metal- Mechanical & Electronics 851730 Telephonic or telegraphic switching apparatus 98,330,643 MTM Metal- Mechanical & Electronics 870422 Diesel powered trucks weighing 5-20 tonnes 79,168,676 HTM Metal- Mechanical & Electronics 847192 Computer input or output units 76,538,742 LTM Various (inc. jewelry, crafts) 640299 Footwear, outer soles/uppers of rubber or plastic, ne 74,444,463 HTM Metal- Mechanical & Electronics 847330 Parts and accessories of data processing equipment ne 72,323,698 Not surprisingly, Chinese imports do compete with local producers in such sectors such as footwear, textiles and garments, and metal products, in which the trade balance remains negative. Yet although this trade is highly asymmetric, in the Peruvian case this has not exactly led to de-industrialization. The overall effect of an expanded market and better access to competitive intermediate goods, for example, appears to outweigh the negative effects of Chinese imports on specific sectors. A recent study by Cardenas and Gavilano (2013), for example, found that Chinese import penetration had a positive effect on real wages in companies belonging to sectors not directly competing with China, and less impact on the wages of workers in those sectors that do compete directly. Firms that do not compete with Chinese products are able to benefit from imports of intermediate goods at lower prices and increase their exports by extended market effect and better trade relationship. Even in sectors such as apparel and textiles, where Chinese penetration since 2007 has reached 20% and 28%, respectively, it should be noted that many firms tend to manufacture products with a large share of imported components. Hence the detrimental effect of Chinese competition should be weighed at each stage of the production process. 13

Figure 3. Penetration of imports from China into the Peruvian market, by sector Source: Cárdenas and Gavilano (2013) In this sense, the free trade agreements (FTA) signed with China and other partners have been very important, motivating more Peruvians to look across the Pacific for new business opportunities. The FTA with China, covering merchandise, services and investment, allows 83.5% of Peruvian exports to enter China with zero tariffs (Gonzalez Vigil 2012). Importantly, it also provides some protection for Peruvian products most vulnerable to Chinese competition, such as textiles, 56% of which were excluded from the tariff elimination schedule. While FTAs alone cannot turn the tide of history in regard to primary export dominance in Peru, they have generated new dynamism and modest but important diversification of trade. Within the first year of implementation of the FTA with China, for example, the number of Peruvian exporters to the Asian giant grew by 30%, to around 500 companies, and total trade with China increased 25 percent. Although 95% of this was still in traditional exports, Peru exported 140 new nontraditional products to China that year. In the first two years, traditional exports increased by 28% (largely due to world mineral prices), while non-traditional exports grew 29%, in this case due to expanded production and sales in the fishing, agro and metallurgical industries (MINCETUR 2012). After three years, Peruvian exports of manufactured goods to that country grew by 46%, as compared to 13% in total export growth. In regard to China, there has been considerable dynamism in Peru s chemical, agricultural and fishing sectors. As pointed out by Peruvian Minister of Agriculture, Milton Von Hesse at the First Meeting of Ministers of Agriculture of China, Latin America and the Caribbean, Peru's agricultural exports to China grew 8.7 times since the FTA went into effect. This forum is a Chinese government initiative to strengthen cooperation with Latin America to address the food and agricultural needs of both regions. Given the growing concerns in China about 14

food security, as well as the changing tastes and purchasing power of its population, Peruvians are optimistic about increased exports in that sector. If we analyze the Peruvian export structure by the technological level of the traded goods, we can also see (in Table 4) that over the last decade, Peru has increased the technological level of its exports. In 1997, 83.6% were pure primary goods (PG), while 14.4% were what is called natural resource based manufactures (NRBM). By 2011 this pattern had changed, as 28.9% were primary goods (PG), while 70.5% were natural resource based manufactures (NRBM). Although the majority of the latter are also mineral-related, the highest growth rates in this category are in foods and agro-based manufactures. Of course in these products the level of technological elaboration is still relatively low, but as we will see, China has also been the main destination for Peru s medium technology manufactures (MTM). If we compare the average annual growth rate of Peruvian exports by technological classification (Table 5) we see that the sectors with the highest growth from 2005 to 2010 were the natural resource base manufactures (NRBM) and the medium technology manufactures (MTM), at approximately 25% per year. The structure of exports to Japan follows the same pattern as those of China. Overall, Peruvian exports to Japan grew at an average annual growth rate of 10.3% from 1995 to 2011, and most have been concentrated in fisheries, mining and oil products. In 1997, fishery exports to Japan accounted for 24.6% of the total, while mining and oil were 57.5 percent. Since then, mining and oil exports have increased to 76.2% as of 2011. However, there has also been an interesting increase in participation of the chemicals sector, which in 1997 accounted for just 3.9% of exports to Japan, by 2008 was 8.0%, and in 2011 had grown to 11.5% of the total. Imports from Japan to Peru remain very concentrated in the chemical, metal-mechanics and electronics sectors. Exports to Republic of Korea also followed this pattern until 2008, concentrated in fisheries, mining and oil products. Since then, however, the Peruvian chemical industry began increasing its participation in total exports to Rep. Korea. Furthermore, according to UN Comtrade data, Rep. Korea was the destination with the highest average annual growth rate for both high technology manufactures (HTM) and medium technology manufactures (MTM). Between 2005 and 2010, exports of high technology goods to Rep. Korea grew at 40.9%, while exports of the same technology sector to Japan and China grew at 11.9% and 15.7%, respectively, over the same period of time (Table 5). That this began before the Free Trade Agreement (FTA) was signed between Peru and Rep. of Korea in March of 2011 bodes well for the prospects of further expanding nontraditional exports to that country. **** As we have seen, Peruvian exports to Asia have been historically concentrated in primary commodities, especially minerals and hydrocarbons. To the extent that Asian demand for these resources is higher than the world average (60,9% of total Peruvian world exports are minerals, versus 78% to Asia), then one can say that this demand contributes to reinforcing Peru s primary commodity orientation. However, Peru has made notable efforts to offset this trend, through bilateral trade agreements, multilateral alliances, and promotion of nontraditional exports. Although the trade pattern with China is very concentrated in mining and 15

related products, that country has also become a growing destination for Peruvian manufactures, with particular dynamism in sectors such as chemicals and agro-industry. Moreover, such manufactured exports have grown at a faster pace with China than with other destinations; in other words, overall there has been a positive evolution with China as a destination for value-added exports. The challenge is to continue this trend, taking more energetic measures to assure that as Chinese demand evolves, it can also become a market for higher value-added Peruvian exports. 16

Agriculture and Livestock Metal- MechanicalandElectr onics Table 2a. Peru exports and imports by sector to Asia main trading partners and the World, 1997, 2008, 2011 (share of total exports and imports to main destinations) China Japan Korea World 1997 2008 2011 1997 2008 2011 1997 2008 2011 1997 2008 2011 Exports 1.8% 0.7% 0.7% 9.7% 1.7% 2.7% 23.0% 4.1% 3.2% 12.0% 8.3% 9.9% Chemical 0.0% 0.5% 2.1% 3.9% 8.0% 11.5% 5.4% 0.5% 13.7% 8.1% 15.0% 15.6% Fishery 79.9% 22.5% 17.5% 24.6% 9.7% 8.7% 10.1% 7.3% 4.3% 20.8% 7.7% 6.9% 0.0% 0.1% 0.0% 0.2% 0.1% 0.0% 0.0% 0.1% 0.0% 0.9% 1.1% 1.0% Mining and Oil 16.2% 74.2% 78.5% 57.5% 79.7% 76.2% 58.8% 86.9% 78.2% 45.2% 59.2% 60.9% Textile and Leather 2.0% 0.3% 0.3% 3.3% 0.7% 0.9% 2.6% 1.1% 0.5% 8.2% 6.6% 4.4% Wood and Paper 0.0% 1.7% 0.8% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 1.4% 0.9% Various (inc. jewelry, crafts) 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 3.6% 0.6% 0.4% Total Peru exports (in million USD) 490.6 3,735.0 6,961.4 473.6 1,860.0 2,174.6 91.5 552.0 1,694.9 6,759.4 31,288.2 45,636.1 Agriculture and Livestock Metal- MechanicalandElectr onics Imports 1.0% 0.6% 0.6% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 15.1% 10.4% 10.7% Chemical 12.9% 25.4% 19.4% 12.4% 12.8% 19.1% 16.1% 40.1% 30.6% 21.4% 30.3% 30.2% Fishery 0.0% 0.0% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.3% 0.4% 39.3% 47.6% 50.4% 79.0% 83.7% 76.7% 61.8% 51.7% 56.4% 40.1% 34.9% 35.7% Mining and Oil 11.1% 2.9% 3.1% 0.1% 0.1% 0.5% 0.2% 0.1% 1.0% 11.6% 14.0% 11.5% Textile and Leather 8.8% 10.0% 12.5% 1.5% 0.2% 0.5% 15.1% 4.3% 2.3% 2.8% 3.2% 4.0% Wood and Paper 0.9% 1.5% 1.3% 0.3% 0.2% 0.2% 0.8% 1.3% 1.3% 3.8% 2.9% 2.8% Various (inc. jewelry, crafts) 25.7% 12.0% 12.5% 6.5% 2.9% 3.0% 6.0% 2.5% 8.3% 5.0% 4.0% 4.9% Total Peru imports (in million USD) 216.4 4,069.5 6,321.0 479.4 1,277.0 1,309.3 253.9 780.0 1,491.5 8,558.3 29,952.8 37,747.1 Source: Authors calculations based on UN COMTRADE 17

Table 3a. Average annual growth rate of Peru exports and imports by sector to Asia main trading partners and the World, 1995, 2000, 2010 China Japan Korea World 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 Exports Agriculture and Livestock 15.3% 17.0% 64.4% -11.1% 1.1% 14.3% -22.0% 11.7% 33.8% 0.8% 15.8% 18.8% Chemical 65.0% 29.2% 58.2% 53.0% -6.3% -4.1% -30.4% 20.9% 45.1% 9.7% 32.9% 13.7% Fishery 6.9% 13.0% 9.2% 1.9% 11.0% 9.0% 1.9% 15.2% 9.5% 2.5% 7.5% 9.2% Metal- MechanicalandElectr 2114.9% 1.5% 13.9% 7.1% 16.8% -39.3% -17.3% 28.4% 8.7% 18.3% 14.8% 14.7% onics Mining and Oil -4.4% 70.3% 28.6% -16.4% 24.0% 31.4% 13.7% 9.6% 33.3% 3.7% 24.9% 18.0% Textile and Leather 26.9% -5.5% 8.6% -9.9% -3.5% 4.6% -11.2% 15.0% 11.1% 9.9% 12.9% 4.1% Wood and Paper 136.2% 89.6% 33.1% -10.1% -20.5% 6.9% -90.5% 1238.3% 47.5% 31.6% 16.2% 6.5% Various (inc. jewelry, crafts) -94.4% 1362.4% 6.6% 9.8% -10.2% 3.8% 55.2% -2.5% -15.9% -10.2% 17.2% 0.6% Imports Agriculture and Livestock 62.6% -11.7% 32.6% -10.6% 12.5% 35.8% -24.8% -4.3% 35.6% -3.4% 10.1% 16.3% Chemical 18.9% 30.5% 42.3% 13.0% 1.4% 32.4% 22.3% 25.2% 21.5% 1.2% 15.8% 19.5% Fishery 1.8% 86.3% 82.6% 41.0% 46.4% -37.7% 67.8% 14.3% 1.6% 28.7% 24.0% 27.7% Metal- MechanicalandElectr -4.1% 36.8% 40.1% -1.8% -2.7% 24.6% -6.1% 8.8% 29.2% -3.4% 7.7% 24.4% onics Mining and Oil -4.2% 12.2% 39.0% 13.2% -16.5% 38.5% -3.9% 21.3% 92.5% 9.1% 20.7% 10.0% Textile and Leather 21.5% 26.3% 32.0% -14.4% 8.8% 16.9% 3.3% -9.1% 3.8% 2.5% 14.2% 19.4% Wood and Paper 3.0% 42.3% 43.6% 12.1% -2.7% 11.1% 31.8% 29.5% 2.2% 1.7% 7.2% 14.8% Various (inc. jewelry, crafts) 3.1% 25.3% 23.4% -21.8% 6.0% 10.2% -20.5% -11.8% 13.4% -6.9% 11.1% 17.3% Source: Authors calculations based on UN COMTRADE 18

Table 4. Peru export and import structure to Asia main trading partners and the World, 1997, 2008, 2011 (share of total exports to main destinations) China Japan Korea World 1997 2008 2011 1997 2008 2011 1997 2008 2011 1997 2008 2011 Exports PG 83.6% 25.2% 28.9% 60.0% 24.9% 25.6% 73.7% 9.8% 18.9% 61.5% 47.1% 49.9% NRBM 14.4% 74.4% 70.5% 36.7% 74.4% 73.5% 24.4% 89.2% 80.7% 23.7% 41.6% 41.5% LTM 0.8% 0.1% 0.1% 3.0% 0.6% 0.8% 1.7% 1.0% 0.4% 10.3% 8.5% 5.9% MTM 1.1% 0.3% 0.4% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 2.1% 2.2% 2.2% HTM 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% 0.3% 0.3% Total Peru exports (in million USD) 490.6 3,735.0 6,961.4 473.6 1,860.0 2,174.6 91.5 552.0 1,694.9 6,759.4 31,288.2 45,636.1 Imports PG 0.8% 1.0% 1.2% 0.0% 0.2% 0.6% 0.0% 0.0% 0.2% 17.2% 19.9% 18.0% NRBM 13.2% 8.8% 7.8% 4.7% 4.7% 8.1% 8.8% 8.1% 7.0% 16.9% 17.3% 17.2% LTM 40.4% 29.3% 29.6% 7.9% 7.6% 8.5% 11.8% 13.1% 9.9% 12.4% 13.3% 13.6% MTM 29.1% 32.7% 33.4% 73.7% 81.0% 76.5% 66.8% 66.8% 70.3% 37.2% 37.3% 39.2% HTM 16.2% 28.0% 27.8% 13.6% 6.5% 6.2% 12.4% 11.9% 12.5% 15.6% 11.7% 11.6% Total Peru imports (in million USD) 216.4 4,069.5 6,321.0 479.4 1,277.0 1,309.3 253.9 780.0 1,491.5 8,558.3 29,952.8 37,747.1 Source: Authors calculations based on UN COMTRADE Notes: Sector classified by levels of technological sophistication, as Lall (2000).:PG = Primary goods, NRBM = Natural resources based manufactures, LTM = Low technology manufactures, MTM = Medium technology manufactures, HTM = High technology manufactures 19

Table 5.Average annual growth rate of Peru export and import structure to Asia main trading partners and the World, 1995, 2000, 2010 China Japan Korea World 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 1995-2000 2000-2005 2005-2010 Exports PG 5.5% 17.2% 15.7% -6.8% 7.4% 4.2% 5.5% -16.7% 25.0% 4.7% 15.6% 14.6% NRBM 3.9% 66.9% 28.9% -5.9% 21.1% 35.1% 4.5% 31.9% 32.9% 2.6% 31.4% 18.9% LTM 14.0% 4.2% 18.2% -9.1% 0.4% 1.4% -19.7% 14.5% 12.6% 8.3% 15.3% 5.2% MTM -41.0% 78.9% 25.0% 37.5% -17.6% 23.4% 49.3% 82.8% 35.8% 8.8% 19.0% 16.8% HTM 878.1% 61.2% 15.7% 1471.8% -1.8% -11.9% 58.1% -17.3% 40.9% 13.7% 11.3% 11.2% Imports PG 83.2% -1.9% 43.2% 22.9% 26.3% 5.8% 21.5% 31.9% -21.2% 3.9% 16.2% 12.1% NRBM 6.7% 21.5% 34.4% 10.6% 1.2% 40.0% 20.4% 17.0% 24.1% 1.0% 9.4% 18.6% LTM 10.9% 23.3% 36.6% 10.6% 0.0% 27.1% 3.9% 1.9% 28.2% -1.2% 12.9% 21.3% MTM -5.5% 34.8% 39.1% -1.9% -4.6% 27.5% -5.6% 7.5% 30.8% -3.3% 9.5% 23.2% HTM 1.6% 41.6% 36.4% -11.8% 13.3% -0.1% 1.5% 12.4% 0.9% 0.3% 7.9% 18.5% Source: Authors calculations based on UN COMTRADE Notes: Sector classified by levels of technological sophistication, as Lall (2000).:PG = Primary goods, NRBM = Natural resources based manufactures, LTM = Low technology manufactures, MTM = Medium technology manufactures, HTM = High technology manufactures 20

Part III: Asian Investment in Peru In the 1960s and 1970s there was a wave of Foreign Direct Investment (FDI) into Latin America, led by Japan and having Brazil as its main destination. While Asia accounts for a greater share of Latin American exports and overall trade today than in prior decades, foreign investment from Asia still lags well behind. It is difficult to trace the total amount of FDI coming from Asian countries into Latin America, because of the tendency to use tax havens in Panamá and the Caribbean to redirect such investments across the Americas. However, it appears that the appeal of this region as an Asian FDI recipient remains less than in that past era (Gonzalez Vigil 2012). And without considering tax havens, Brazil also appears to remain the top destination for Asian investment, now largely from China and Rep. Korea (Kuwayama et al. 2010). This is not surprising, as Brazil has the largest domestic market, and strong trade relations with MERCOSUR partners and other South American countries to supply with manufactured goods and raw materials (Gonzalez Vigil 2012). Mexico is also a major destination for Asian FDI, in large part because of its role as a gateway to the US and Canada markets through NAFTA (Falck 2012), but also because of its Economic Partnership Agreement (EPA) with Japan signed in 2005. During the last decade, the main source of foreign direct investment in Peru has been the European Union. This came mainly from Spain and the UK, which by 2009 accounted for 23% and 20% of the total FDI stock in Peru, respectively. The third major direct investment partner was the United States, with US$ 2,6 billion in FDI stock by 2009, which represented 15% of total FDI. In Latin America countries, the main investor in Peru was Chile, which by 2009 had invested US$ 1,290 million and had shown an increase of 171% since 200o (Chavez and Dupuy 2010; Proinversion). In 2012, the total stock of FDI in Peru was estimated at US $22.5 billion by Proinversión, the government investment promotion agency. Of this amount, the main investors were... and the main sector receiving this investment was mining, with 24,45% of the total (Proinversión). However, according to the Central Bank, which includes not only new capital but also reinvestment by companies, the total stock of FDI in Peru at the end of 2012 was $ 63.4 billion (Aguino 2013). In this case the mining sector is even more important. As in the cases of Brazil and Mexico, the first major Asian investments in Peru were from Japan, and were entwined with the emotional ties of having a large Japanese descendent population. Today, the main investments are from China, constituting X% of total FDI in 2011 (2012?), and 23% of projected FDI in mining. Japanese investment in Peru: learning from the past In the 1960s, Japanese companies went to Peru to ensure market share against possible protectionist measures established by the import substitution (ISI) model being implemented at the time. The idea was that Peru might serve as a platform to expand 21

vehicle assembly (for Toyota and Nissan) and produced kitchen condiments (Ajinomoto) for the rest of the region. During the same period, there were also significant Japanese investments in the exploitation of Peru s natural resources. In 1973-1975 a consortium of Japanese companies (Mitsui Mining and Smelting and Nippon Mining) was positioned to purchase at least three major copper projects: Katanga, Santa Lucia and Michiquillay (De la Flor 1993). However, most of these did not materialize due to differences with the Peruvian government regarding the management of foreign capital and labor policies. In the oil sector, Mitsui, Marubeni and Mitsubishi, established JAPECO (Japan-Peru Oil Corporation), to work alongside the state entities Cofide and Petroperu to build the North-Peru oil pipeline. Although considerable Japanese FDI came to Peru between 1965 and 1975, in subsequent years the investment and trade relations decreased abruptly. As mentioned above, these were crisis years in Peru and on the international level. However, during the 1990s, political and economic cooperation between Peru and Japan was very active. Japan helped then-president Fujimori to revive Peru s standing in the international community, facilitating meetings with international organizations and principal creditor nations. Peru was supported by Japan in its adhesion to APEC in 1997, after which Peru became the beneficiary of a series of technical assistance programs. However, the Japanese private sector was largely absent from Peru (Kamiya 2004). Few Japanese manufacturing companies retained operations in Peru, and those that came in the 1990s opened primarily representative offices. Although there were small mining investments in those years, these were mainly in partnership with local or foreign companies. Gonzalez Vigil (2012) proposes four main factors that explain the loss of Peru s investment and trade position with Japan between the 1970s and 1990s: (i) human insecurity and the presence of terrorism; (ii) high economic instability as a result of mishandled economic policies in the second half of the 80s, (iii) geopolitical insecurity and strategic distrust that marked the relationship with the U.S. since the 70s and (iv) erroneous trade policies taken by Peru during 1975 2000. Additionally, Kamiya (2004) details the recession in Japan since 1989 and the so-called "lost decade syndrome", as external factors that prevented Japanese companies from getting nvolved in investments in Peru, both in the manufacturing sector and in the privatization of public enterprises. Given the mistakes and limitations of Peruvian policies, as well as negative external factors, other countries in Latin America were able to benefit more from Japanese investment. This includes the relocation of automobile manufacturing to Colombia, and the ability of Chilean maritime and air transport companies to take the lead in those sectors. These phenomena, in turn, had longer term detrimental effects on Peruvian production and resulted in loss of competitiveness in global markets. By 2013, the main Japanese investments in Peru were in the mining sector. Table 6 summarizes the main current and announced investments by Japanese companies. As can be seen, almost all of these are held as minority shareholders alongside other foreign investors. 22

Table 6. Current and announced investments from Japanese companies Sector Project Japanese Company Investment (in million USD) Comments Mining Bayovar Mitsui & Co. Ltd. 1/ 275 (in 2010) Huanzala Mitsui Mining & Smelting Co. Ltd. 2/ 50 (in 2011) 38 (in 2010) 21 (in 2009) Antamina Mitsubishi3/ n.a. Quellaveco Mitsubishi 4/ 3300 Holds 25% of Bayovar phosphate mine project. Bought from Vale (Brazil) Through its subsidiary Compañia Minera Santa Luisa S.A. BHP Billiton (33.75%) Xstrata (33.75%) Teck (22.5%) Mitsubishi Corporation (10%) Anglo American Quellaveco S.A (81.9%). Mitsubishi (18.1%) Environmental impact assessment (EIA) approved. Probably starting operations in 2016 Quechua (Espinar, Cusco) Pan Pacific Copper Corp., JX Nippon Mining Holdings, Mitsui Mining & Smelting Co. Ltd. 5/ 490 Exploration Sources: 1 / Reuters. "Brazil Vale sells Bayovar stake to Mosaic, Mitsui". March 31, 2010.Gestion, "Japanese Investment in Peru bordering the US$6 billion" February 11, 2011 2 / INEI. "Investment in mining by company: 2009-2011". Retrieved May 8, 2013. 3 / Antamina.Official Website. 4 / Ministry of Energy and Mines, "Expected portfolio of mining projects." January 2013. 5 / Ministry of Energy and Mines, "Expected portfolio of mining projects." January 2013. South Korea investments in Peru: partnership for the future Peru has a Free Trade Agreement with South Korea in effect since 2011. In May of 2013, Peruvian President Humala paid his first state visit to South Korea, where he had been stationed as a military attaché to the Peruvian embassy in the early 2000s. Both countries agreed to elevate their relationship to strategic integrated association, and to give greater impulse to their political, economic and trade ties. A stated priority for both heads of state was cooperation in the development of new investment, as well as the exchange of knowledge and technology (Gonzalez Vigil 2013). Investment by South Korean firms in Peru to date has focused primarily on the extractive industries: mining, oil and gas exploration and exploitation. Some of the oil and gas operations have been undertaken alongside the much larger China National Petroleum Company (CNPC). In the fishery sector, an acquisition proposal for Pesquera Diamante was launched by Dongwon Industries, but it has not been confirmed. Among the new agreements signed in 2013, was the decision to have Peru produce Korean airplanes for the rest of Latin America, through a contract between the Peruvian government and the Korean Agency for Promotion of Investment and Trade (KOTRA). Agreements were also signed for industrial and technological cooperation (Ibid). Table 7. Current and announced investments from Korean companies Sector Project Korean Company Investment (in million USD) Comments Oil& Gas Block Z46 (Trujillo basin, La Libertad) SK Energy 1/ 482.62 Exploration in progress 23

Block 8 (Trompeteros y Yanayacu, Loreto) SK Energy, Daewoo, Korea National Oil Corporation (KNOC) 2/ n.a. Project in production phase. Korean interest is divided in: SK Energy 8.3%, Daewoo 11.6%, Korea National Oil Corporation (KNOC) 20%. Pluspetrol Norte S.A. holds 60% of the project and is property of Pluspetrol Resources Corporation (55%) and China National Petroleum Corporation, CNPC (45%) Mining Fishery Block 115 (Datem del Marañón, Loreto ) Savia Peru Block Z-2B (Talara,Piura) Mina Justa San Juan de Marcona, Pachapaqui DesalinationPlant - Cerro Lindo Pesquera Diamante S.A. acquisition Korea National Oil Corporation (KNOC) 3/ Korea National Oil Corporation (KNOC) 4/ Korea Resources, LS-Nikko Copper 5/ n.a. n.a. 744 Project in exploration phase. Korea National Oil Corporation, KNOC 30%, Pluspetrol 70%. Korea National Oil Corporation (KNOC) 50%, Ecopetrol 50%. Project in production/exploration phase Environmental impact assessment (EIA) approved. Starting operation in 2015 Brescia Group (CumbresAndinas) 70%, Korea Resources 15%, LS-Nikko Copper 15%. Korea Zinc 6/ 200 In progress Doosan 7/ n.a. To be completedby 2013 Dongwon Industries Co 8/ n.a. Notconfirmed Sources: 1 / Central Reserve Bank of Peru. "Inflation Report March 2013": 2/3/4 / Korea National Oil Corporation, Operations 5 / Andina. "Korean firms investment in Peru would sum U.S. $ 6.600 billion." August 12, 2011. 6 / Peru 21, "South Korea wants to invest in the energy sector in Peru". February 26, 2012.Ministry of Energy and Mines, "Expected portfolio of mining projects." January 2013. 7 / Doosan."Doosan water plants".retrieved May 8, 2013. 8 / Business Week. "Reportedly Eyes Dongwon Fisheries, Dongwon But Does Not Disclose Confirms Target Name". Retrieved May 8, 2013. Chinese investments in Peru: learning by doing Chinese investment in Peru was virtually nonexistent until 1992, when the Shougang Group bought the state-owned iron ore company, Hierro Peru. At the time it was the largest Chinese investment in Latin America, at US $118 million, and the first state enterprise sold off by the Fujimori Administration (Sanborn and Torres 2009). In 1993 Sapet, a subsidiary of the China National Petroleum Company (CNPC) also purchased some state-owned assets in the Peruvian oil industry. Yet fifteen years would pass before more significant Chinese investments would flow into Peru. By the mid-2000s, the Chinese government s Go Out policies were taking effect in our region. In 2007 and 2008, three of Peru s largest new copper concessions passed into Chinese hands. 15 This includes Toromocho, one of the world s richest copper claims, which requires the relocation of an entire city as well as considerable investment in environmental remediation. To date at least 14 Chinese firms, primarily state-owned but also some with private or mixed capital, have invested in mineral projects in the Northern and Central Highlands, and in hydrocarbons in the Amazon. In 2012 China was still only the 10 th largest foreign investor in Perú, but was the largest single investor by country in the mining sector, representing around 20% of total FDI in that sector. 15 The Rio Blanco project in the Northern region of Piura, was purchased by the Xiamen Zijin Tongguan Investment Development (Zijin Consortium) for US $182 million. Galeno, in the Cajamarca region and adjacent to the Newmont-owned Conga project, was purchased by Minmetals Nonferrous Metals Company and Jiangxi Copper Company. Toromocho, in the historical central mining region of Junín, was purchased by the Aluminum Company of China (Chinalco) for USD $790 million. 24

The majority of Chinese investments are concentrated in copper and iron, and since 2007 they have involved new concessions purchased directly or through the takeover of junior firms. The majority are still in the exploration stages, though Toromocho the largest Chinese investment to date at US $2.2 billion is now under construction. The Chinese still have only one operating mine in Peru - Shougang (Marcona). Although Chinese investment remains relatively low overall, the Peruvian government holds are high expectations for the future. By 2020 Peru expects to receive US $56 billion in mining investments, 94% of which will go to copper, gold, iron and zinc, and an estimated $12,5 billion of that is expected to come from China. In addition to Tomomocho, it is anticipated that a Chinese firm will take over the enormous Las Bambas copper projected, currently owned by Xstrata, as a result of Chinese regulators negotiations over the takeover of Xstrata by Glencore. Table 8. Current and announced investments from Chinese companies Sector Project Chinese Company Investment (in million USD) Comments Toromocho Chinalco Peru (Chinalco) 1/ 2150 Possibly completedon 2014 El Galeno China Min Metals Corporation 2/ Jiangxi Copper Company Ltd. 3/ 2500 Possibly completed on 2014-2015 China Min Metals Corporation (60%), Jiangxi Copper Company Ltd.(40%) Mining Extension of Marcona mine Shougang Hierro Peru (Shougang Corporation) 4/ 1200 In progress Pampa de Pongo Nanjinzhao Group 5/ 3005 Investment over 2010-2014 Rio Blanco Zijing Mining Group 6/ Tongling Nonferrous 7/ Xiamen C&D 8/ (former Monterrico Metals y Majaz) 1500 Mina Justa CST Mining Group Limited 9/ n.a. Investment over 2009-2014. Zijing Mining Group(45%) Tongling Nonferrous (35%) Xiamen C&D (20%) Until 2012. Afterwards sold their participation (70%) to Cumbres Andinas Cercana project (Yarabamba, Arequipa) Llama TY01 (Huancano, Ica) June field Group 10/ to be defined Exploration Jintong Mining 11/ to be defined Exploration Marcobre China SciTech 12/ n.a. Exploration Shandong Exploration 13/ n.a. Exploration Anhui Exploration 14/ n.a. Exploration Hebei Exploration 15/ n.a. Exploration Oil& Gas Block 6 / 7 (Talara, Piura) Block 111/113 (Madre de Dios) Block 1AB (Olaya, Loreto) Block 8 (Trompeteros y Yanayacu, Loreto) China National Petroleum Corporation (CNPC) 16/ China National Petroleum Corporation (CNPC) 17/ China National Petroleum Corporation (CNPC) 18/ China National Petroleum Corporation (CNPC) 19/ n.a. Since Januray 1994 and October 1995. n.a. n.a. n.a. Project in exploration phase Already in production. Holds 45% of the project. Pluspetrol Resources Corporation holds the 55%. Already in production. Holds 27% under its stake in Pluspetrol Norte S.A. Other partners are SK Energy (8.3%), Daewoo (11.6%), Korea National Oil Corporation, KNOC (20%) and Pluspetrol Resoruces Corporation (33%). Sources: 25

1 / Andina. "Chinalco and Shougangwill invest more than US$ 3,000 million in Peru since 2010." November 23, 2009. 2 / Gestion. China Minmetalswill run project to exploit gold and copper.retrieved March 8, 2013. 3 / El Comercio. Jiangxi Copper estimated Galeno project to commence production between 2014 and 2016. March 28, 2012. 4 / BN Americas.Expansion in Marcona and new players will quadruple Shougang iron ore in Peru to 2016. January 17, 2013. 5 / BN Americas.Expansion in Marcona and new players will quadruple Shougang iron ore in Peru to 2016. January 17, 2013. 6 / 7 / 8 / Sanborn and Torres (2009).Gestion. Chinese Mining to invest US$ 7.400 million in Peru. Retrieved May 8, 2013.Andean.Chinese mining giants to invest US$ 7.4 billion in Peru over next 5 years. May 11, 2009. 9 / Financial Times. "CST Mining Group Ltd". 10 / Ministry of Energy and Mines, "Expected portfolio of mining projects." January 2013. 11 / Ministry of Energy and Mines, "Expected portfolio of mining projects." January 2013. 12 / 13 / 14 / 15 / Irwin and Gallagher (2012) 16/17 / China National Petroleum Corporation.CNPC in Peru. 18/19 / Pluspetrol Norte SA partners While extractive industry investments have been predominant, Chinese investors have begun to show interest in other sectors of the Peruvian economy. One well- known case was the application of Hutchison Port Holdings to an operations bid for the Port of Callao North Pier. Although the tender was won by APM Terminals, a subsidiary of A.P. Moller-Maersk Group, there is strong interest from Chinese investors in entering the logistics sector and other areas related to overall development of the Peruvian economy (Sino-Peruvian Businessman 2013). However, interviews with businessmen and diplomats from both countries suggest that there are numerous obstacles for Chinese state-owned firms, and also for individual entrepreneurs, wishing to invest more in Peru. Some of these are related to Peru s basic regulatory requirements for all investors, which may nonetheless seem especially cumbersome for Chinese unfamiliar with the region. This includes such chores are obtaining work visas, translating and officiating documents and obtaining permits for various stages of operation. Tender processes for infrastructure investments also tend to be very complicated for Chinese investors. There are also some personal challenges, such as long delays in obtaining visas for family members. More specific obstacles to attracting investment from China stem from problems of compatibility between the Chinese and Peruvian tax and legal frameworks and financial systems. This is made worse by the lack of professionals on both sides with appropriate language and cultural skills. At a higher level, a serious challenge lies in the fact that although Peruvian policymakers have been successful at negotiating free trade agreements and other state to state accords, Peru does not seem to have as clear a strategy for following up on these opportunities, and the Peruvian state does relatively little to accompany, finance or otherwise support private entrepreneurs in this process. Indeed, although nontraditional export promotion is a stated objective of Peruvian authorities, it has not been given the kind of sustained attention and investment it requires in the current competitive environment. The drastic neoliberal reforms of the 1990s, enshrined in a new Constitution, have left a legacy of aversion to any state-guided industrial policies, or systematic investment and export sector promotion efforts. As a result, most business with Asia today is being driven by private companies and individuals with little assistance from government, thereby losing opportunities for better negotiation and better deals (Wise 2013; ). Once a tender offer is won, and once the Chinese investors have complied with initial central government rules and regulations, they then find that they may have to communicate and negotiate with a large number of other parties. Depending on the type of investment, these may include popularly-elected regional and municipal authorities, indigenous communities, non-governmental organizations (NGO) and diverse media, as well as local bankers and business competitors. Such diversity of 26

actors is normal in a volatile democracy like Peru and successful Western investors have learned over time how to respond to them. Yet Chinese businesspeople and diplomats are less experienced at multi-stakeholder relations and less accustomed to demands for accountability from non-state actors. However, as recent studies of Chinese investment in the mining sector suggest, they are learning quickly. A note on global standards and the Chinese experience Chinalco is building a new city of Morococha with an investment of $50 million, according to the Spanish-language announcement. First a new city. Then the initialization of operations. This is responsible mining. We re Chinalco. We believe in Perú. 16 Latin America today accounts for nearly a third of total world mineral investment, and a growing share of this is expected to come from Chinese-owned firms, which own or participate in at least 35 major projects across South and Central America. As mentioned at the outset, policymakers in this region are concerned not only with avoiding the negative macroeconomic effects of excessive dependency on mineral exports. They are also concerned with issues of revenue transparency, with achieving adequate environmental and labor standards in the industry, and with having companies practice good community relations and corporate social responsibility. In this context, the enormous advantages of attracting Asian investment, especially when backed by state development banks, may be tempered by concerns over the ability or willingness of these investors to comply with global standards. This is especially the case in regard to Chinese state-owned enterprises. The mining industry in China itself has had severe problems with safety and environmental regulation, and some Chinese companies operating in Africa have been accused of gross human rights violations. Chinese companies have practiced the kind of transparency that many in Latin America have come to demand, and for the most part they do not participate in the EITI and other voluntary standards initiatives. However, numerous analysts have also suggested that the key issue is not whether a company is Chinese, or of any other nationality, but rather the willingness and capacity of host countries to regulate them adequately (Gallagher and Irwin 2012; Gonzalez Vicente 2012). Such issues are being put to test in Peru today. Peru leads Latin America in efforts to implement new standards for the mining industry, and to use the revenues that it generates to advance an array of development goals. Peru has increases taxes and royalties on mining operations, and established a major scheme for redistribution of revenues to local and regional governments (through the mining canon). In 2012 Peru became the first country in the Americas to be declared Compliant within the Extractive Industries Transparency Initiative (EITI). And in 2011, Peru became the first country to try and implement ILO Convention 169, guaranteeing the rights of indigenous and tribal peoples to prior consultation on major projects that affect their lives. 16 http://www.bloomberg.com/news/2010-11-01/china-becomes-boss-in-peru-on-50-billion-mountainbought-for-810-million.html 27

Yet social conflicts involving mining companies remain high in Peru, including disputes over land and water rights, revenues and environmental contamination. This has contributed to delays in most major investments, and generated considerable corporate and government concern about losing the revenues streams involved. Have Chinese state-owned firms reacted any differently than their peers in the industry, to social conflicts and to changing regulatory demands? This is the subject of ongoing research on both sides of the Pacific, and there is not space here to respond in detail. 17 However, we can say that in the initial cases in Peru, neither the Chinese investors nor their diplomats did due diligence on the conditions they would face, and Peruvian authorities may not have been forthcoming about these as well. This is especially the case in the North of Peru, where resistance to mining per se is high. Meanwhile, in the case of Shougang, there were definitely mistakes made in engaging with the local union and municipal authorities, conflicts around labor rights and water management, with a reluctance to invest the time and money necessary to clean up the operation and engage various stakeholders adequately Although the Chinese government has a strong interest in making these investments work, they may have initially been too inexperienced, or to far away, to guide these such efforts. Nonetheless, what we are observing today are definitely processes of learning, on the part of Chinese investors and their political allies. This includes learning from other Chinese, from other firms in the industry, and from hiring the best managers and consultants in Peru to guide them through the process. Even Shougang, perhaps the most widely criticized Chinese mining case in South America, has made notable efforts to correct its errors, as well as to invest new resources in its operation. At present, however, the most widely watched case is Toromocho, where Chinalco has committed to building a state-of-the art mining operation, a new water treatment plant, and carrying out a process of voluntary and participatory relocation, moving an entire town to new quarters in which living conditions are expected to improve for all. This has never been done before in Peru, and is apparently rare in China as well. For China, and for Peru, this project should show the world that both sides are serious about global standards. Only time will tell if this is the case. 17 Cite Sanborn, Chonn and Paredes 2013 (unpublished); Gallagher and Irwin, Gonzalez Vicente, Moran. 28

Part IV: Final Remarks As stated at the outset, this paper aims to contribute to regional discussions about the nature and impact of Latin American relations with Asia, taking into account the diversity of countries that comprise that broad region as well as the commonalities that might emerge. The underlying concern of this workshop, is whether recent economic and trade relations with Asia help or hinder Latin American efforts to achieve sustained growth, diversify their economies and raising living standards for their populations. For some, including most heads of state, trade and investment with Asia is seen as an enormous opportunity to advance all of these goals. For others, however, the voracious Asian demand for raw materials brings the risk of greater Latin American dependency on primary commodity exports, and the displacement or undermining of national industries. How policymakers respond to, or shape, these emerging relations, are also key issues under debate. In the Peruvian case, as we have seen, there are deep historical ties with China and Japan, which facilitated the close relations being forged with both countries today. However, Peru has also opened new channels of interaction with South Korea and numerous other Asian partners. Trade with Asia in general, and China in particular, has contributed to Peru s booming economy over the last decade, and to its ability to weather the effects of the global financial crisis. As we analyze the data -- and the dynamics -- of these relationships, we find that although Peru s trade with Asia tends to reinforce its overall position as a mineral exporter, the country has not experienced significant de-industrialization. To the contrary, through pursuit of free trade agreements and new foreign investment, trade with Asia has increased in scope and diversity, with considerable increases in nontraditional exports to the region as well as traditional minerals, fisheries and foodstuffs. In fact, manufactured exports have grown at a faster pace with China than with other destinations. And although the relations are highly asymmetric, and not all sectors of the Peruvian economy have benefitted those that face direct competition from Chinese imports have of course had a harder time -- the net effect of expanded markets and access to lower priced intermediate goods appears to be positive for Peruvian industry. We should also note that nontraditional export values have not been subject to the dramatic price fluctuations that affect primary goods, and instead are part of a genuine trade expansion and diversification effort. The commodity boom would have taken place with or without the FTAs: what these have done is enable diversification of trade in other goods, even with a context of high world minerals prices. Meanwhile, new investment from Asia, backed by state banks in the Chinese case, has enabled Peru to develop large-scale mineral projects with important spinoffs in other sectors of the economy, even amidst a context of global uncertainty. 29

Although Peruvian leaders and trade negotiators have been successful in obtaining new trade agreements, and the private sector reaction to these has led the economy forward, not backwards, political leadership and strategy have been lacking in the follow-up to these accords. On the most basic level, we find excessive bureaucratic obstacles to Asian investment in Peru, and a limited effort or ability to prepare the way for newcomers and their potential clients and stakeholders. Most public servants lack the necessary language or cultural skills to assist Asian companies and professionals wishing to do business in Peru, or vice versa. And to date the Peruvian government has invested virtually nothing in developing research or training Peruvians in knowledge and skills needed to engage with Asia over the longer term. On a higher level, once the State visits have ended and the agreements signed, there has been little effort to coordinate trade, investment and economic development policies to take better advantage of Asian opportunities. For example, more pro-active public policies are needed to enhance the industrial capabilities of Peruvian firms in nontraditional sectors, and synchronize private actions. Government should work with firms and guilds to obtain better negotiation positions vis-à-vis Asian partners, and to expand cooperation in areas such as technology transfer and capacity building. In many parts of the country there is a serious lag in infrastructure ports, airports, roads and transportation systems, water and energy all of which is needed to accompany and expand new private investment. With the mining sector itself, more needs to be done to encourage clusters, organize the many firms that supply goods and services to the industry, and generate opportunities for many more people. Peru has made enormous strides across the Pacific, but they are still tentative steps. Without greater leadership, coordination and strategy, without more investment of time and resources from government, trade agreements will remain superficial and their longer term benefits will not be fully realized. 30

References Amos Irwin and Kevin P. Gallagher (2012) Chinese Investment in Peru: A Comparative Analysis. Working Group on Development and Environment in the Americas. December 2012. Aquino, Carlos (2013). China and Peru Relations after 41 years of diplomatic links and three years of a FTA, http://asiapacifico-carlos.blogspot.com/2013/03/china-and-peru-relations-after- 41-years_6404.html Berrios, Ruben, (2010) Bridging the Pacific: Peru s search for Closer Economic Ties with China in Latin America Facing China: South-South Relation beyond the Washington Consensus (CEDLA Latin America Studies), Ed. Fernández Jilberto, Alex E. and Hogenboom, Barbara, Berghahm Books: New York. --- (2005). Peru and Japan: An Uneasy Relationship, Canadian Journal of Latin American & Caribbean Studies, Vol. 30, No. 59. http://www.questia.com/library/1g1-147114996/peru-and-japan-an-uneasyrelationship Birdsall, Nancy, Ricardo Hausmann, Carlos Lozada and Helmut Reisen (2009). Hacia la estabilidad y el crecimiento en America Latina BANDAI CO., LTD. Bustos, Sebastian, Charles Gomez, Ricardo Hausmann and Cesar Hidalgo (2012). The Dynamics of Nestedness Predicts the Evolution of Industrial Ecosystems. Center for International Development at Harvard University CID Working paper No: 236. Bahar, Dany, Ricardo Hausmann and Cesar Hidalgo (2012). International Knowledge Diffusion and the Comparative Advantage of nations. Center for International Development at Harvard University CID Working Paper No: 235. Cárdenas, Carolina and Giuliano Gavilano (2013). El Efecto de las Importaciones Provenientes de China en los Salarios Reales: Una Aproximación Microeconómica para el Caso Peruano entre los Años 2007 y 2010. Investigación Económica 2. Lima: Universidad del Pacífico. Chavez, Benjamin and Jaime Dupuy (2010). Inward FDI in Peru and its policy context. Columbia FDI Profiles. Vale Columbia Center on Sustainable International Investment. In: [http://www.vcc.columbia.edu/files/vale/documents/peru_ifdi_aug_4_final. pdf] 31

De la Flor, Pablo (1991). Japón en la escena internacional. Sus relaciones con América Latina y el Perú. Lima: CEPEI. --- (1993). Peruvian Japanese Relations: The Frustration of Resource Diplomacy. En Stallings, 1993, pp. 171 190. Falck, Melba (2012). Japanese Foreign Direct Investment in Mexico and the Impact of the Global Crisis. Journal Globalization, Competitiveness & Governability 6 (1): 36 54. Gallagher, Kevin and Roberto Porzecanski (2010). The Dragon in the Room. Stanford University press. Stanford, CA. Gonzalez Vigil, Fernando (1994). Relaciones económicas del Perú con los países del Asia Pacífico. Análisis Internacional, 5, 85 113. --- (2012). Relaciones de comercio e inversión del Peru con el Asia Pacífico. En: Instituto de Estudios Internacionales (IDEI) (ed.), Veinte años de Política Exterior Peruana (1991 2011). (pp. 209 241) Lima: PUCP. Gonzalez Vigil, Fernando and Tatsuya Shimizu (2012). The Japan-Peru FTA: Antecedents, significance and main features. IDE Discussion Paper 335, 31pp, March. Chiba (Japón): Institute of Developing Economies. http://www.ide.go.jp/english/publish/download/dp/335.html Gonzalez Vicente, Ruben (2012). The Political Economy of Sino-Peruvian Relations: A New Dependency?, Journal of Current Chinese Affairs, 41.1, 97-131. http://journals.sub.uni-hamburg.de/giga/jcca/article/view/496/494 Inter-American Development Bank (IADB) (2012). Shaping the future of the Asia Pacific and Latin America and the Caribbean Relationship. Washington, DC: IADB. Kamiya, Marco (2004). Japanese investment in Peru: Limits of developmental investment. GSAPS Journal, Nov 8, 2004. Kuschner, Eve (2001). Japanese Peruvians: Reviled and Respected. NACLA: Report on the Americas, December 2011. http://www.evekushner.com/writing/japanese-peruvians-reviled-and-respected/ Kuwayama, Mikio, Jose Duran Lima and Marcelo LaFleur (2010) Latin American and Asia Pacific trade and investment relations at a time of international crisis. Santiago de Chile: ECLAC. Lall, Sanjaya (2005). Rethinking Industrial Strategy: The role of the State in the Face of Globalization. In Putting Development First: The Importance of Policy Space in the WTO and IFIs, ed. K. P. Gallagher. London: Zed Books. 32

Lausent-Herrera, Isabell (2011). The Chinatown in Peru and the Changing Peruvian Chinese Communities. Journal of Chinese Overseas 7 (2011), 69-113. Sanborn, Cynthia and Victor Torres (2009). La economía china y las industrias extractivas: desafios para el Peru. Universidad delpacífico, 2009. Sanborn, Cynthia and Juan Luis Dammert B (2013). Natural Resource Extraction, Economic Development and Social Inclusion: Peru. Americas Quarterly Special Report, February 16, 2013. Wise, Carol (2013). Tratados de libre comercio al estilo chino: los TLC Chile- China y Perú-China. Apuntes vol. XXXIX N 71: 161 188. Lima: Centro de Investigación de la Universidad del Pacífico. Interviews Chief Consultant for community relations, for major Chinese-owned mining project (2013). Lima, January 8, 2013. Interview with Cynthia Sanborn. CEO, Public Relations Manager and Government Relations Manager, major Chinese-owned mining company (2013). Interview with Cynthia Sanborn and Victoria Chonn, Lima, March 19, 2013. Peruvian Foreign Affairs Ministry Official (2013). Interview with Alexis Yong. Lima, May 14 th, 2013 Sino-Peruvian Businessman (2013). Interview with Alexis Yong. Lima, May 15 th, 2013. Japanese-Peruvian Businessman (2013). Interview with Alexis Yong, Lima, May 21 th, 2013. 33